Why Larry Summers sees danger ahead for the economy

November 20th, 2014

Like British Prime Minister David Cameron, Larry Summers sees warning lights flashing on the world’s economic dashboard. Summers, who served through 2010 as President Obama’s top economic adviser and was Treasury Secretary under Bill Clinton, said America should be acting now to shore up its economy, instead of celebrating its status as the healthiest patient in the global economic sick ward.

For starters, Summers said in an interview Tuesday: We should invest in public infrastructure, including energy infrastructure. Including oil pipelines.

Does that include the Keystone XL oil sands pipeline, a project that the Senate is voting on Tuesday — and one that has drawn little enthusiasm from the White House?

Yes, he said. “I suspect we should do the Keystone pipeline if it is still the relevant pipeline — which is very much in doubt. We certainly should not stand in the way of the Keystone pipeline,” Summers said. “We should be trying to use this moment to maximize use of our energy resources.”

Summers has voiced support for Keystone before, including in a September speech at the Brookings Institution. But building oil pipelines isn’t the only thing Summers thinks we should be doing. We should be lifting decades-old restrictions on energy exports, he said, and building up our ports to handle the traffic. We should be updating an air traffic control system that, he said, “runs on vacuum tubes.”

“There is an enormous amount of work that needs doing,” Summers said, to “put people to work in the short run and raise the efficiency of the economy in the medium and the long run.”

“What we need is a focused a growth strategy that recognizes the importance of generating healthy demand rather than a strategy that either accepts the lack of demand or tries to generate demand by driving down interest rates beyond extraordinary lows,” Summers said.

When told that he sounds frustrated with both Democratic policymakers and Republican ones, Summers said: “That was the way I intended to sound.”

For at least a year — long before Cameron warned of another looming economic disaster in Monday’s Guardian newspaper — Summers has been ringing alarm bells about the need for national governments, including the U.S. government, to prop up demand and stimulate economic activity.

With Europe stagnant, China cooling and Japan, Russia and Brazil dogged by recession, Summers — who removed himself from the running for Federal Reserve chairman last year — argues that we should forget about the national debt and start taking advantage of abnormally low interest rates to borrow and spend on worthwhile investments that will boost growth now and in the future.

That idea is unlikely to gain much traction on Capitol Hill, where resurgent Republicans are still focused on cutting spending. But Summers says we should be doing other things, too, such as promoting immigration and overhauling the business tax code, ideas with bipartisan support.

Why? Because, he warns, if Europe falls into the same kind of prolonged slump that has plagued Japan for the past 20 years — a real possibility, economists say — America’s ability “to maintain enough demand to support the global economy will be very much in doubt.”

Japan, which slipped back into its fourth recession in six years on Monday, hasn’t had “a moment of dramatic crisis,” Summers said. Instead, it’s had a generation of “prolonged sluggish and disappointing performance. And that’s the risk that may be ahead for large blocs of the global economy.”

Lawrence H. Summers is the Charles W. Eliot University Professor and President Emeritus at Harvard University. He served as the 71st Secretary of the Treasury for President Clinton and the Director of the National Economic Council for President Obama.